CPA Regulation (REG) : Special Issues in Corporate Taxation
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Personal Holding Company Tax
Carrick Corp. met the stock ownership requirements of a personal holding company. What sources of income must Carrick consider to determine if the income requirements for a personal holding company have been met?
I. Interest earned on tax-exempt obligations
II. Dividends received from an unrelated domestic corporation
Neither I or II
I only
Both I and II
II only
II only
For personal holding companies (PHCs), income requirements only apply to rent, taxable interest, royalties, and/or dividends. Since interest on tax-exempt obligations is nontaxable, this would not apply to the income requirements.
Example Question #2 : Personal Holding Company Tax
Answer Corp. has two common stockholders. Answer derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Answer is a:
Corporation subject to tax only on income not distributed to stockholders.
Personal holding company.
Regulated investment company.
Corporation subject to the accumulated earnings tax.
Personal holding company.
Personal holding companies (PHCs) are defined as being more than 50% owned by five or fewer individuals, and having 60% of AGI consisting of: rent, taxable interest, royalties, and/or dividends.
Example Question #3 : Personal Holding Company Tax
Sleigh Corp. is a calendar year domestic personal holding company. Which deduction(s) must Sleigh make from Year 17 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?
I. Federal income taxes
II. Net long-term capital gain (less related federal income taxes)
Neither I or II
Both I and II
II only
I only
Both I and II
To assess the 20% tax on undistributed net income, taxable income must first be reduced by federal income taxes and net long-term capital gains to determine the personal holding company income prior to the dividend paid deduction.
Example Question #4 : Personal Holding Company Tax
The personal holding company income test requires the company’s income for a given taxable year to be at least:
60% of adjusted ordinary gross income
50% of taxable income
30% of undistributed personal holding company income
80% of ordinary gross income
60% of adjusted ordinary gross income
There are two criteria in determining whether a company is a personal holding company 1) more than 50% of the stock must be owned by 5 or fewer individuals and 2) at least 60% of the adjusted ordinary gross income must consist of certain investment income. The stock ownership test is 50% and income test is 60%.
Example Question #5 : Personal Holding Company Tax
ABC Corp has 2 common stockholders. ABC derives all of its income from investments in stocks and securities, and it regularly distributed 51% of its taxable income as dividends to its stockholders. ABC is a:
Corp subject to tax only on income not distributed to shareholders
Personal holding company
Corp subject to the accumulated earnings tax
Regulated investment company
Personal holding company
Personal holding company status applies if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income.
Example Question #6 : Personal Holding Company Tax
In order for an S Corp to have a valid election, the decision must be agreed upon by _____.
Majority shareholders
50% of shareholders in writing
One shareholder
All shareholders in writing
All shareholders in writing
When dealing with a Subchapter S corporation, the election is only valid when agreed upon by all shareholders of the organization in writing.
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